Re-balance Cycle Reminder

Based on our monthly re-balance calendar, the next re-balance time will be on next MondayNovember 19, 2012. You can also find the re-balance calendar of 2012 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Also please note that we now list the next re-balance date on every portfolio page.

New Features

We hope you enjoy the new home page design. Notice that we now use 2 level pull down menus for various pages that used to be listed as direct links from home page. These include those ETF and Mutual Fund portfolios, 401K plans (under What We Do tab). 360 Degree Market Overview and other pages are now under Market tab. 

We believe the new home page, the new Dashboard and new Get Started flow will help many new and old users to navigate and use our systems more easily. We will continue to improve our usability while in the meantime, offering more effective solutions and information to long term (retirement) investors. 

Again, we call for more active community participation from you. For support issues, if it is not involved with your privacy, please post in our support forum so that knowledge can be shared and objective opinions can be discussed. If you have not noticed, we have also had commentary system in place in virtually all types of pages including those of articles, plans, portfolios and funds (scroll down to the bottom of a page and you will see the comment box).  Post your questions and comments, we will get back to you timely. Hopefully, some of them can be answered by other fellow users. 

Multiple Portfolios As Another Diversification Demension

As markets have behaved irrationally, mostly driven by central banks and natural deleveraging forces for the past several years, investors have found it is increasingly difficult to stick to an investment strategy. Human nature calls for short term or even instant gratification. How to effectively control our behavior is perhaps the most important factor in investing. 

One way to counter this is to diversify. It is well known that spreading your investments in a diversified array of assets can improve your risk adjusted returns. However, diversification can also make positive impact on investing process psychologically: you gain exposure to performing assets when others are tanking, making you less vulnerable to human hyper active ego to win. We argue that, in addition to improved risk adjusted returns purpose, adopting multiple portfolios or investment strategies can add another dimension to diversification that can better control our behavior. 

We published an article three years on titled as Diversify Asset Classes AND Investment Strategies. In it, we stated: 

If done it right, diversification, however, is still the most effective way to reduce risks. The following are the three key issues to construct such a portfolio.

  1. Diversify across many asset classes: as stated above, even though most asset classes were correlated during the 2008 crisis, the few bright spots were US treasuries (especially the long term treasury bonds), GNMA and gold. For example, the static or ‘lazy’ portfolio proposed by Yale’s David Swensen in his bookUnconventional Success: A Fundamental Approach to Personal Investment allocates 15% US treasury bonds (such as Vanguard long term treasury bond index fund VUSTX) as insurance against sudden market crisis (the other 15% in inflation protected bonds such as Vanguard’s VIPSX as inflation hedge in the total 30% fixed income allocation). This has alleviated some big loss for the portfolio in 2008. Interested readers could find more information from the portfolio maintains here. Diversification in diverse assets is the first step. We encourage readers to at least consider the major asset classes and the ETFs or index funds in the table at the end of this article.
  2. Tactical asset allocation: simply holding an array of diverse assets statically is not effective to reduce the systemic risk. The next step is to adopt tactical asset allocation, i.e. change asset allocation mix as market condition changes. The following are some strategies:
    • Follow great asset allocation investors: it is hard, if not possible, to predict asset trends. One way is to rely on third party recommendation on asset allocations. For example, Charles Schwab regularly recommends the asset weighting based on their market outlook. The recommendations are limited to stocks and sometimes general bonds. It is also unclear how effective those recommendations have been in the past. The other way is to identify some great investors or funds in asset allocation and follow their actions. ValidFi maintains a service called Guru Asset Allocation Watch to allow users to monitor Gurus like John Hussman (HSGFX), Jeremy Grantham’s GMO Alpha Only III (GGHEX), Steven Leuthold’s Core Fund (LCORX), Ivy Asset Management’s Asset Strategy (WASAX) and PIMCO All Asset (PASDX) managed by Rob Arnott in Research Affiliated.
    • Use market timing to safe guard against market loss: Many people have mistaken market timing technique as a simple ‘all in and all out’ single asset trading technique. In fact, applying market timing properly in a diversified portfolio has been effective to reduce risk and thus increase risk-adjusted return dramatically. For example, in his Seeking Alpha article, Mebane Faber proposed using 10 month moving average to safely guard each asset in a diversified portfolio. Such a portfolio has performed relatively well. Readers could find more detailed information and up to date performance in a strategy maintained by
    • Use cross asset momentum: It is well known that momentum driven investment strategy has worked reasonably well in the past (but sometimes, it is still subject to whipsaws due to side way movement). However, momentum across diverse assets has been doing even better due to the mega trends often exhibited in major asset movement. Several academic studies have also confirmed this. Interested readers could find out more information from strategies like Goldman Sachs Global Tactical Asset Allocation on
  3. Diversify across various strategy styles: we could further diversify by choosing different styles of strategies in asset allocation and individual asset investing. For example, one could choose one or multiple equity (stock) strategies in the equity portion of the portfolio. Just as in a static portfolio, it is important to choose strategies which are uncorrelated (aside from good returns) to further reduce risk. Try to avoid choosing similar styles. For example, a momentum based strategy tends to do well in a trendy market but not well in a range bound market. In fact, an equity based momentum strategy did very poorly in 2005 but did a super job in 2008 (for a long short momentum strategy). If such a momentum strategy is chosen, it makes sense to mix it with other strategy styles such as a value based or a long short hedge strategy (such as covered call strategy) to hedge each other. Multiple strategies could be also chosen for other assets such as commodities and fixed income. We will have more follow up articles on this subject.

There are many ways to achieve diversification using multiple strategies or portfolios. A simple way is the well known core-satellite approach that invests in both Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA). The following shows the core-satellite portfolio Harry Browne Permanent Portfolio Core Satellite performance: 

Portfolio Performance Comparison (As of 11/09/2012)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Vanguard ETFs Tactical Asset Allocation Moderate -1.3% 7.7% 8.2% 138.7% 8.1% 71.1% 6.2% 48.2% 10.0% 76.8%
Harry Browne Permanent Portfolio Core Satellite -0.3% 7.2% 6.4% 126.6% 9.0% 116.7% 6.9% 77.2% 9.5% 103.2%
VBINX -1.5% 8.7% 10.6% 123.2% 9.0% 82.6% 3.8% 22.6% 6.7% 45.9%
Harry Browne Permanent Portfolio 0.5% 6.7% 4.8% 79.4% 10.0% 151.2% 7.6% 90.1% 8.9% 109.8%

*: NOT annualized

**YTD: Year to Date

See the up to date performance here >>

Another way is to use other portfolios for risk asset or fixed income portion. For example, one can customize a risk profile 0 (i.e. it can invest up to 100% in risk assets such as stocks and commoditites) TAA portfolio (let’s call it equity portfolio) such as this P_41433 (MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Risk Profile 0) and then construct a static portfolio using 60% in the first equity portfolio and then 40% in fixed income using P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Quarterly (listed on Advanced Users page). You can use other percentages other than 60%/40% for your risk profile. 

The following shows the performance comparison between the combined portfolio TAA Equity And Bond Manager Of The Year and the original MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate. One can see it improves the return (13% vs. 11.1% in the last 10 years) and Sharpe ratio. 

Portfolio Performance Comparison (as of 11/09/2012)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
VFINX -2.5% 11.7% 14.6% 99.3% 10.2% 54.7% 1.1% 3.0% 6.4% 25.2%
TAA Equity And Bond Manager Of The Year -1.3% 5.8% 6.4% 98.1% 5.9% 51.2% 7.1% 58.1% 13.0% 106.4%
VBINX -1.5% 8.7% 10.6% 123.2% 9.0% 82.6% 3.8% 22.6% 6.7% 45.9%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate -1.2% 5.4% 5.7% 93.1% 5.8% 53.7% 6.6% 57.7% 11.1% 92.8%

*: NOT annualized

**YTD: Year to Date

See the up to date performance comparison >>

There are numerous ways to mix and mesh different portfolios and back test their performance. For example, you can use value funds for U.S. small cap stocks as your U.S. equity investment or use sector rotation. You can also use managed futures as your commodity exposure etc. The key here is that it is worthwhile to explore along this dimension. This is not only useful for investors who are active and have relatively large account, it is also beneficial for other investors to gain this knowledge to better understand the investment process. 

Market Overview

Stock markets under went post election reality check and lost several percentage points.  Now that the uncertainty of next four years’ presidency is gone and we are facing the fiscal cliff immediately, it is becoming more likely to see a major trend shift. From the major asset trend table on 360° Market Overview, one can see that other than international REITs (RWX), bonds are now taking up the top spots. We are still not yet to see a complete trend shift but probably are in the process already. 

We remain deeply skeptical on this rally. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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